Blue Monday have posted an interview with Andrew Brazier, lead programmer at Headfirst Productions about thier upcoming game, Call of Cthulhu. Heres a sample:
How did you implement sanity into the game? Could a character go insane permanently?
Sanity can be lost when your player sees or hears certain things during the game. For example, he might find the mutilated body of a friend or he might see a horrible creature. This reduces their sanity and has effects like visual and audio distortions and even stuff like hallucinations. You can gain sanity back, by defeating creatures or maybe saving the life of an NPC. However, if you have lost sanity you can never be completely sane again.